NEWS HEADLINES

Fannie Mae Scopes Micro Loans

By Jerry Ascierto

Fannie Mae has rolled out a new small-balance loan program, called Micro Loans, to complement its conventional small-loan program.

The Micro Loans program targets loans of up to $750,000 on properties of five units or more, a market segment dominated by community banks. The company expects the bulk of Micro Loan deals to be for Class B and C buildings housing those earning 100 percent of the area median income and below. Tax credit properties, however, are not eligible for the program.

Fannie Mae’s conventional small-loan program, 3MaxExpress, makes loans of up to $3 million (and up to $5 million in strong markets). But the program was a bad fit for loans of less than $1 million, the company said. “The underwriting that you need to do on a loan of $750,000 and below really can’t, in a cost-effective manner, be the same underwriting that you do on a larger loan,” said Rick Wolf, who heads Fannie Mae’s small loan programs. “The drivers of the credit risk are different.”

For instance, the Micro Loan program looks more at the borrower’s FICA score (700 or better is the requirement) instead of the third-party analysis and asset management requirements that are hallmarks of underwriting larger loans.

As such, the paperwork for Micro Loans is more streamlined than the larger 3MaxExpress program. Borrowers are not required to submit annual financial statements, for instance. And third-party reports, like engineering and environmental reports, are streamlined to save borrowers money.

The Micro Loans program features a maximum loan-to-value ratio of 75 percent, and offers 10-, 15-, 20-, and 30-year amortization schedules. To be competitive with community banks, the program offers a debt-service coverage ratio (DSCR) of just 1.10x, compared with the standard 1.20x DSCR on 3MaxExpress loans.

Fannie Mae is still fleshing out the program. At press time, Fannie Mae had five lenders delegated to make Micro Loans and more on the way, but declined to name those lenders.